The use of multiple reference points in risky decision making

Abstract (Gregory J. Koop , Joseph G. Johnson)

Among psychologists and economists, prospect theory continues to be one of the most popular models of decision making. The theory’s key property is reference dependence; specifically, how an individual’s perception of loss or gain is dependent upon their starting point (i.e., the status quo). Although prospect theory is widely accepted, other authors have sought the inclusion of reference points besides the status quo. Initially these extensions focused on the importance of single reference points such as goals. More recently, authors have explained choice data by including multiple reference points within the value function. Multiple-reference-point theories generally assume that many choice situations possess an implicit or explicit goal, or point an individual will strive to obtain, and/or a minimum requirement (i.e., a lower bound) above which an individual will strive to stay. In two experiments, we present evidence that individuals can utilize the minimum requirement, status quo, and goal within a single risky decision task. Participants most often chose to maximize their chance of reaching reference points even when that decision was riskier, resulted in lower expected value, resulted in lower expected utility, or ran contrary to the predictions of prospect theory. Furthermore, salience and uncertainty moderated the use of goals and minimum requirements as reference points.

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29. July 2010 by Miguel Barbosa
Categories: Curated Readings, Risk & Uncertainty | Leave a comment

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